Lloyds tail risks receding, says Goldman as it upgrades

By Michele Maatouk

Date: Tuesday 12 Mar 2019

(Sharecast News) - Goldman Sachs upped its stance on Lloyds Banking Group to 'neutral' from 'sell' on Tuesday, lifting the target price to 66p from 57p as tail risks recede.GS said its 'sell' thesis was predicated on its assumption that ring-fencing would result in lower mortgage pricing and thus adversely impact Lloyds' proﬁtability.

"While mortgage pricing has fallen markedly since, Lloyds has been able to offset this through consequent deposit repricing, changes in loan book mix and increases in the structural hedge.

It noted that since adding the shares to the 'sell' list in September 2016, they are up 13.9% versus Goldman's coverage down 0.1% and the FTSE World Europe up 8.5%.

Goldman said it now incorporates two further base rate hikes in its estimates and lowers its cost of equity assumptions to reﬂect receding tail-risks.

"Lloyds should beneﬁt from higher rates through its structural rates exposure (equity and non-interest bearing deposits) and deposit beta (i.e. by not passing on the beneﬁt of rate hikes in full to interest bearing deposits).

"However, we continue to forecast lower mortgage pricing to adversely impact proﬁtability. That said, further rate hikes are likely to reduce the overall impact somewhat."